CME Group Inc. — Q2 2015 Form 10-Q
Business context and reporting period. Unaudited results cover the quarter and six months ended June 30, 2015, compared with the corresponding 2014 periods. CME Group operates derivatives exchanges and clearing services; its principal revenue source is clearing and transaction fees.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $820.0 million | $731.6 million | $1,662.7 million | $1,509.0 million |
| Operating income | $495.1 million | $412.0 million | $1,002.4 million | $866.5 million |
| Operating margin | 60.4% | 56.3% | 60.3% | 57.4% |
| Net income attributable to CME Group | $265.0 million | $263.8 million | $595.4 million | $530.6 million |
| Diluted EPS | $0.78 | $0.79 | $1.76 | $1.58 |
| Operating cash flow | Six-month amount: $677.7 million | Prior-year six-month amount: $554.7 million |
Q2 revenue rose 12%, while six-month revenue increased 10%. Clearing and transaction fees increased 12% in Q2 and 10% year to date; market data revenue rose 15% and 12%, respectively. Futures and options contract volume increased 7% in Q2 and 9% in the first half; the average rate per contract rose 4% in Q2 and 1% year to date. Foreign exchange, agricultural and energy volumes were notably stronger, while equity volumes declined.
Expenses increased 2% in Q2 and 3% in the first half, slower than revenue growth. Q2 net income was nearly unchanged despite higher operating income, principally reflecting a $61.8 million debt prepayment charge and the resulting deterioration in non-operating results. Six-month net income increased 12%.
Liquidity, debt and cash flow
- Cash and cash equivalents were $1.151 billion at June 30, 2015, down from $1.366 billion at December 31, 2014. Operating cash flow was $677.7 million; investing activities used $1.1 million and financing activities used $891.7 million in the first half.
- Long-term debt had a carrying value of $2.241 billion and par value of $2.25 billion. The company issued $750 million of 3.00% notes due 2025 and repaid $612.5 million of 4.40% notes due 2018, paying a $60.5 million call premium.
- The company reported no borrowings under its $2.3 billion corporate revolving facility or its $7.0 billion secured clearing-liquidity facility. It reported approximately $2.3 billion of excess corporate borrowing capacity and compliance with debt covenants.
- Reported current assets and liabilities include $42.2 billion of performance bonds and guaranty fund contributions on each side of the balance sheet; these collateral-related balances should not be viewed as ordinary corporate liquidity.
- Cash dividends paid were $1,006.7 million in the first half. The equity statement reports common dividends of $1.00 per share for the period.
Material changes, outlook and risks
- Operating performance benefited from higher trading activity and a richer product mix. Electronic trading represented 88% of Q2 volume, versus 86% a year earlier. Market data revenue also benefited from reduced fee waivers, partly offset by lower subscriber counts associated with pricing-policy changes.
- Unusual items included the $61.8 million debt prepayment cost; a $5.9 million gain on the sale of BM&FBOVESPA shares; and a GFI Group termination fee received in Q1, which management cited as contributing to higher operating cash flow. CME continued to own approximately 5% of BM&FBOVESPA after the sale.
- Management gave no specific earnings or revenue guidance. It cited ongoing market and volatility factors—including interest-rate expectations, currency movements, crude-oil supply uncertainty and agricultural weather—as drivers of trading activity. Management expected to maintain an investment-grade rating.
- Key risks include competition, technology reliability and cybersecurity, changes in regulation, trading-volume and rate-per-contract fluctuations, customer concentration, clearing-member defaults, and the ability to manage costs and debt. Management reported no material change in market-risk exposure since year-end and no material update to annual-report risk factors.
- Legal matters include Fifth Market patent litigation, for which the company could not estimate a reasonably possible loss range, and a CFTC action against NYMEX and two former employees. Management stated it believes it has strong defenses in the CFTC matter. Accrued legal and regulatory matters were $3.5 million at quarter-end.
- Management concluded disclosure controls were effective and reported no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether higher trading volumes and the improved product mix persist, and how changes in volatility or customer mix affect revenue and average fees.
- The recurring earnings and cash-flow profile excluding the debt prepayment charge, BM&FBOVESPA sale gain and GFI termination fee.
- Liquidity available for corporate purposes versus collateral and regulatory resources held for clearing operations.
- Outcomes and potential financial exposure from the disclosed patent and CFTC proceedings, which remain uncertain.
- Effects of market-data pricing changes, reseller concentration and the new revenue-recognition standard, whose impact was still under evaluation.